Byline: Stephen Labaton New York Times
L. William Seidman, the nation's top banking regulator, said Monday he had recommended that the Federal Deposit Insurance Corp. borrow $10 billion to avert the possible insolvency of the program that protects bank deposits and that the interest on the loan be paid by raising the annual contributions of banks by 18 percent.
Seidman, chairman of the FDIC, said that by borrowing the money rather than relying solely on bank contributions, the agency would be able to raise substantially more money. Neither he nor the administration has said whether the money should be lent by the government or the banks.
The increase in the premium to be paid by the banks could take effect by June 30, he said. The increase would put the premium at 23 cents for every $100 in deposits, up from 19.5 cents.
The board of the FDIC is expected to take the first step toward carrying out the premium increase on Thursday by seeking comment on a proposed rate increase, a move that in the past has invariably led to increases.
The bank insurance fund, which protects deposits up to $100,000 per account, is having serious problems. The White House and the Congressional Budget Office have forecast that a growing number of failures of large banks could make the fund insolvent within two years.
An insolvent bank insurance fund would raise the possibility of another costly taxpayer bailout to protect the insured deposits at the failed banks. The bailout of the savings and loan industry, approved in August 1989, is expected to cost taxpayers hundreds of billions of dollars.
Payouts last year to depositors and to banks that agreed to buy failed institutions left the bank fund with $8.5 billion at the end of the year, down from $13.2 billion at the end of 1989.
This year the fund is expected to post its fourth consecutive annual drop and its largest decrease since its creation in 1934.
"No one knows how much will ultimately be enough" to ensure the soundness of the fund, Seidman said in an impromptu meeting with reporters Monday afternoon after delivering a speech in Washington to the annual conference of the Institute of International Bankers. "What we believe is $10 billion ought to get us through this year even under the most adverse conditions."
Although the refinancing of the bank insurance fund is widely considered to be the most pressing domestic financial issue confronting the Bush administration, the Treasury Department has left it largely in the hands of the FDIC.
Three weeks ago, Treasury Secretary Nicholas F. Brady presented a wide-ranging proposal to overhaul the banking laws, but it was vague on the topic of replenishing the fund, noting only that any solutions should be long term, should rely on industry money and should not injure the health of the banking system.
The Treasury Department declined to comment on Seidman's proposal Monday, although Brady's views on the FDIC plan are expected to become known today and Wednesday, when he appears before the Senate and House banking committees.
An increase in premiums to 23 cents would be the second increase in six months and a 92 percent jump from the 12 cents that banks paid last year.
The added cost will affect both customers and shareholders of the nation's 12,300 insured banks.
For the first nine months of last year, the industry reported earnings of about 60 cents for every $100 in deposits.
"It's a tough increase and it will hurt, but the banking community has seen this coming for a long time," said Edward L. Yingling, chief lobbyist for the American Bankers Association.
Seidman said he had still not decided whether the $10 billion should be borrowed from banks, as a banking industry coalition has recommended, or from the Treasury Department, the Federal Reserve, or the Federal Financing Bank, which was established in 1973 to assist agencies whose obligations are guaranteed by the government.
FDIC has the authority to raise premiums; certain new kinds of borrowing would require legislative approval.
The industry group also recommended that premiums be capped at the current rate of 19.5 cents. Each increase of a cent for $100 in deposits raises about $250 million. The proposed increase of 3.5 cents would raise the banks' premiums to the 23- cent level already set for savings and loan associations.
In an interview Monday, Seidman said he recommended the 15-year borrowing plan in a report sent Friday evening to the Treasury Department as part of the first step in a two-part plan to raise cash. He declined to elaborate on the second part of the plan, but people who have been briefed on the proposal said it recommended that the FDIC's authority to borrow from the Treasury be increased, a move that would require legislation.
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